Leases vs. Your Bank
2 Things Your Banker May Not Tell You:
1) Leasing uses up your credit line
Often times, businesses are surprised when the available
cash they've been counting on from their bank credit
line is reduced by the amount of equipment leases they've
done with the bank's leasing department.
Since commercial credit and leasing are frequently different
departments within the bank, it's easy to assume that
the commitments made by each are separate and cumulative,
which is rarely the case.
This is why we advise that you plan ahead and establish
multiple, unrelated credit sources, turning to independent,
non-bank leasing companies for your equipment needs.
Your bank has a credit limit that they'll extend to
you. Typically, whatever you do with them counts towards
it whether it's short term cash borrowing or long term
leasing. If you want to be sure to have cash available
quickly when you need it, you won't want to tie that
credit line up in leasing fixed assets!
2) Compensating balances increase interest cost
Many businesses are lured by seemingly unbeatable rates
to bank leasing programs. But if any part of that plan
includes minimum or compensating balances in any other
account, it may not be as good as it seems.
a loan/line of credit is subject to approval contingent
upon a minimum balance being maintained in your bank
account with that particular bank. This will drastically
increase your effective annual interest rate!
Your bank approves a $50k loan/line of credit with
a contingency of a required minimum $10k balance in
your account at all times. The bank is really only lending
$40k of their money.
Calculate the interest rate and monthly payments based
on the $40k the bank is really lending and you will
have an interest rate that is far from what was quoted
on your so called $50k loan at prime rate...
A few other reasons why the local Bank may not be
attractive for leasing equipment:
Banks will often FLOAT their rates. Equipment Lease
rates are guaranteed fixed for the term of the lease.
Your Credit Report & Fico Score:
- What effect will a new loan have on the cash available
under your current business line of credit, for special
business opportunities, emergencies, etc.? (In most
cases your total access to funds will be reduced).
- Most banks require that credit lines be brought to
a zero balance once every 12 months to reserve the option
to call the line should your industry/economy start
to have a downward trend or your own business prospects
start to go south.
- Banks typically do not fund more than 75%-80%
of equipment cost. Our lease can cover as much as 110%
of the cost. Unlike banks, we will Include freight,
training, installation, taxes, initial maintenance and
soft costs. Many banks will only do "hard"
collateral (machinery, etc.). Most banks will not even
consider "used" equipment, older vehicles,
software or private party transactions. As you know
JB2 Funding has no problem with any of these.
- The bank may place a "BLANKET LIEN"
on all of your assets. At JB2 Funding, we simply file
a UCC on the leased equipment only. Nothing else is
encumbered. None of your financial assets or flexibility
will be compromised.
- If the bank were to decline to renew your line
(at any point in the term), those "blanket liens"
would still be in effect, blocking your attempt to use
your own assets as collateral for any new (replacement)
funding. You will also not be able to subordinate that
lien without their permission should you want to pull
equity out of that equipment.
- Banks require "Ongoing Financial Disclosure"
and updates of your financial position. With a bank
line you have a new vested business partner, requiring
you to submit annual-quarterly financial statements
& tax returns for review. Bank loans are often conditioned
on your maintaining certain bank-specified key financial
ratios. If you fall below the bank's mandated ratios,
you will be in default and the bank can call your loan
or not extend further credit towards your company. Also,
It is routine for banks to restrict your access to any
new debt obligations from any other source without their
express written consent and approval. There are NO financial
reporting requirements with a JB II Funding Lease.
- The bank will likely require you to cross-collateralize
any new obligation with all of the accounts you maintain
at that institution - personal checking, savings, trusts
etc. (buried in the fine print). Your lease with JB2
Funding is a freestanding obligation.
- Fees & Closing Costs:
Bank Fees and closing costs typically run 1%-4% of the
transaction amount and these fees will re-occur annually!!
These fees can have a significant effect on the real
interest rate you are paying. Ask for a copy in writing
before you sign and do the math. JB2 insists on no documentation
fees, no annual fees and no hidden fees.
- Are you a "Key Banking Customer?"
That may sound flattering, but it usually means that
the bank is extending its offer based on your "entire
banking relationship", your other accounts, the
other balances you maintain and the service fees/income
that you generate for them. It also means that you are
tied to that bank exclusively for the term of the loan.
If you move accounts and/or services, your rates will
almost certainly jump way up. Not sure? Ask them specifically
- Banks: Lines of credit & Loans will show up on
your personal credit report as a revolving trade line
or an Installment Loan. This may affect your available
credit, drive down your Fico score and may hinder
your ability to purchase personal items such as an
automobile, house, etc in the future.
- JB2 Lease: Equipment Leases WILL NOT show up
on your personal credit report as a revolving trade
line or installment loan and therefore free up your
credit without hindering your credit availability.
- Banks: Require full review of financials, tax returns
and projections which may take weeks for a turn around
time on approval. A JB2 Lease requires a simple one
page credit application up to $100K. Approvals are issued
within 24 hours.